Moody's Sees Volcker Rule as Credit Positive for Banks

Commenting on the completion of the final Volcker Rule, Moody's Investors Service said that the measure is credit positive for U.S.-based investment banks because it prohibits proprietary trading, which carries risk, while the rule is also less restrictive on market making than it appeared it might be.
By Jake Safane(2147484770)
Commenting on the completion of the final Volcker Rule, Moody’s Investors Service said that the measure is credit positive for U.S.-based investment banks because it prohibits proprietary trading, which carries risk, while the rule is also less restrictive on market making than it appeared it might be.

The Volcker Rule does not set a minimum on the amount of market-making activities that banks have to hold. “This is a positive outcome because the new rule may be less of a hindrance to overall market liquidity than the market feared with the earlier proposal. However, banks would have to set their own internal limits to ensure such amounts do not exceed reasonably anticipated customer demand,” Moody’s said.

Compliance costs will rise as a result of the Volcker Rule, as banks need to calculate seven daily metrics for market making, establishes written policies and procedures, and conduct independent testing/auditing. Still, these practices will help limit risk. “Overall, we view the new requirement to establish a management framework with CEO attestation as a positive corporate governance development,” says Moody’s.

On the other hand, the ratings agency noted that U.S. banks will be at a disadvantage to non-banks and non-U.S. banks who conduct business outside the U.S., so the agency expects “a negative effect on banks’ revenues, although we cannot currently estimate the effect’s magnitude.”

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